Tue. Jan 18th, 2022

The timing could hardly have been worse. Weeks before the launch of a roadshow to convince potential investors to support its highly anticipated wallet, City law firm Mishcon de Reya has agreed to a record fine linked to a series of money laundering offenses.

The sanction, the second in recent months, has been accompanied by a long list of findings against the firm by the regulator, spanning a period of four years to 2019.

As Mishcon prepares to launch its formal offer to investors this month, to garner support for what would be a UK law firm’s largest initial public offering, it will hope they can look beyond such past failures to the merits of a future on the London stock market.

Mishcon hopes to transform its traditional partnership structure into a faster-listed business that can more easily raise cash to expand into Asia and fund acquisitions and investments in areas such as legal services and technology.

After a charged IPO process – it was forced to postpone the move to a partner uprising in 2020 and has faced more than a dozen senior deviations, as well as the recent fines and a £ 2.9 million lawsuit of a real estate investment company – the firm is under pressure to prove that it can finally pick up the driving force.

“The jumbo jet has already started on the runway and it’s going to be very difficult for them to abort now,” said the managing partner of a rival UK law firm.

Growth ambitions

Mishcon, founded in 1937 in a one-room office in Brixton, London by the future Labor politician Victor Mishcon, would be by far the most valuable listed law firm on the London Stock Exchange. It is aiming for a market value of around £ 750 million, according to people close to the process – an amount that would make it worth almost twice as much as its nearest UK public competitor, DWF, and described that one broker as “really ambitious”. .

Victor Mishcon
Victor Mishcon, a future Labor politician, founded the law firm in a one-chamber office in Brixton, South London, in 1937 © Evening News / Shutterstock

The firm declined to comment for this article, but people close to him said it plans to list in the first quarter of this year, with a formal intention to drive announcement as soon as this month.

Mishcon is not part of the “magic circle” of law firms, but has always been dominated by great personalities, such as Anthony Julius, who represented Diana, Princess of Wales, in her 1996 divorce from Prince Charles. It recently tackled Gina Miller’s Brexit case and advises some of the world’s richest families on issues ranging from immigration to reputation.

Under its executive chairman, Kevin Gold, a South African transactional lawyer who held the top job in 1997, it moved from a City firm with a difficult reputation in litigation and family law to a slick corporate operator whose client list Microsoft , Sky includes. and Prada.

The firm increased its revenue from £ 130 million to £ 188 million over the five years to April 2020 and its 177 partners received an average of more than £ 1 million each last year.

But Mishcon has long sought more dramatic growth. Although it does not have an urgent need for cash, he hopes that the funds generated by a public listing will enable it to grow much larger than it can expect through the partnership model, making it more difficult to to raise money.

The firm will tell prospective investors that it wants to move further away from a traditional law firm model to become a broader professional services company, with consulting firms and investments in early-stage legal technology. It already has a “brand management” business and a technology incubator, and will use IPO proceeds for small acquisitions, as well as to hire more lawyers, for example in Asia, according to an update released by the company last April has.

Structural shift

It will not be easy to make the switch.

“When you have a [private law firm] it’s all very simple, you calculate the profits and distribute them to partners. But when you become a listed company, you have to make a profit not only for partners but outside investors. . . It’s a more complex model, ”said Tony Williams, founder of consulting firm Jomati.

An IPO should be profitable for senior executives, including Gold and managing partner James Libson, who will have potentially valuable equity interests – but there could be disadvantages, especially for more junior members.

Bar graph of average earnings per share partner (£ m) showing most profitable UK law firms for partners

As a listed company, Mishcon partners will take a fixed draw – probably lower than their previous profit shares – which will be supplemented by dividends and capital gains on their company shares. They can also be in line for bonuses and long-term incentives.

“If I’re a partner in my mid-40s, I might think about my mortgage and not be excited about my income declining and the rest of the stock market dependent,” Williams said.

Meanwhile, attorneys in the lower ranks are generally motivated by the promise of partnership, and run the risk of the firm’s stock pool being diluted by new shareholders before they get their share.

Mishcon said it would prevent partners from leaving the business for seven years and would give each employee a share, in theory to give legal representatives at an earlier stage.

One senior partner at the firm said there were “many and many partner meetings and many jumped up and down” in the run-up to the IPO plans vote in September. He said he “concluded that there are more advantages than disadvantages.” The IPO proposals were approved with more than 90 percent support.

Mishcon Attorney Anthony Julius
Mishcon lawyer Anthony Julius at the time of Diana, Princess of Wales’s divorce from Prince Charles © John Stillwell / PA

‘Untested in the stock market’

Yet some potential investors have already expressed reservations.

Anthony Cross, a manager at Liontrust Asset Management, has invested in several UK-listed law firms but said he was not considering Mishcon’s driving force. “People are wary of classic human ventures where you have potentially footless, talented individuals.

“The problem for law firms is that they are still somewhat untested in the stock market,” he added. “They do not have the characteristics of a super attractive software company, for example, with a lot of IP and recurring revenue.”

Another fund manager said he is wary of law firms that “carry greater key man risk, where you have some very strong lawyers who have paid a lot of money who can move around”.

However, some analysts and brokers have said that Mishcon could be an extremely attractive investment opportunity due to its strong brand and the fact that its business is detached from the economic cycle.

“Law firms have to make extremely good IPO candidates because they are not related to the economic cycle,” says Gareth Hunt, managing director of legal services at broker Stifel. “Covid was revealing in that sense – profits went to the moon for a large number of firms… But the devil is always in the detail, some companies will migrate better than others.”

A market liberalization in 2007 paved the way for law firms to list on the London market and six did so, although their performance was mixed.

Gateley and Keystone – two of the listed firms – performed strongly, with Keystone’s share price rising more than 300 percent over the past 12 months. But DWF, which listed in 2019 with a valuation of £ 366m, suffered a bruise in 2020 in which he ousted his former CEO. Its shares are trading 8 percent below their listing price.

Michael Chissick, the managing partner of Fieldfisher in London, said the firm considered drifting three years ago but decided against it. “Our clients like the fact that we are not listed and our share price will not move if we win or lose a case,” he said. “And some of the younger partners think so [going public] means to sell the family silver. ”

One broker said he expected Mishcon to push its IPO “really hard”. “But if the market thinks the price is too high, it will just spit it out,” he warned.

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